Telecommunication Investment Joint Stock Company (Svyazinvest) is one of the largest telecom holding companies in the world.
Its charter capital was formed by consolidation of shares owned by the federal government in regional telecom operators, set up in the process of telecom sector privatization. Svyazinvest incorporates 7 large mega-regional telecom operators, OJSC Giprosvyaz and OJSC Rostelecom, the national domestic long-distance and international operator.
Source: operators’ data, Svyazinvest, RusTele.com
The holding accounts for approximately 22% of the total revenue of Russia’s telecommunications industry, which makes it one of the key players on the local telecom market, and the Russian economy as a whole. Ruble-denominated revenue rose 3.8% compared with 2007. The holding’s main companies posted similar figures, with revenue growth ranging from 0.6% to 5.6%. Consequently, the revenue structure of the holding’s companies remained virtually unchanged compared with the year-earlier period.
The holding’s largest telecom operator is still Rostelecom, which derives 65% of its revenue from DLD and ILD traffic. This segment of the market has been showing essentially zero growth as a result of competition with IP telephony and cellular operators. In addition, the LD fixed-line market has seen the entry of some new players that operate mainly in the corporate segment.
Consequently, Rostelecom’s total revenue rose 1.9% year-on-year. The company expects to resolve this situation by bolstering its positions on the longdistance and interconnect market, and by ramping up expansion in the datacom segment.
Revenue growth at regional telecom operators is constrained by the slow pace of development of local voice, which accounts for 41% of their revenues. The main reason for this is saturation of the traditional voice market.
The number of main access lines in service at the Group’s companies rose by a mere 0.5% (to 29.9 mln) compared with the previous year. And given that local voice tariffs were not hiked in 2008, local telephony revenue advanced by only 3.7%. However, local voice revenue trends are expected to improve in 2009 since the Federal Tariff Service has approved the maximum tariff increase for most regional telecom operators. On average, tariffs are set to go up by 8%.
The Group’s companies also reported quite sluggish revenue growth from mobile communication services. Growth stood at 3.9% in 2008, while total revenue amounted to over $0.6 bln.
Svyazinvest’s cellular assets showed quite robust performance for most of 2008, both in terms of connections and revenue trends. The fourth quarter of 2008 was heavily impacted by the global financial crisis, which struck the Russian economy with its full fury at that time.
Also, virtually all market players were hit with a contraction of consumer services in 4Q2008, especially in the corporate clients segment. At this time, the cellular communication segment of private users had only just begun to feel the effects of the crisis, as a result of which the decline in mobile traffic was only marginal.
Despite the prevailing negativity, Svyazinvest’s cellular assets could get a boost as the consolidation of most of the holding’s cellular assets is coming to an end, especially those in the Volga Federal District, which were merged into a single company, NCC which is headquartered in Nizhny Novgorod.
The consolidation is expected to bolster the merged company’s positions in the areas of its operations, which will become increasingly important against the backdrop of the crisis.
As opposed to lacklustre performance on the local voice market, all of 2008 was successful for the datacom segment, which showed no signs of saturation and was virtually unaffected by the economic crisis.
Datacom revenue soared 54.5% year-on-year, while Internet access was 61.4% higher. Internet access remains the key driver for datacom, accounting for 81% of the revenue in this segment.
Meanwhile, xDSL access showed even stronger growth in its subscriber base, more than doubling (+104.8%) over the past year and exceeding 3.6 mln. As a result, Svyazinvest’s companies now have over 37% of all dedicated access users in Russia, and more than 51% of the regional market (not counting Moscow).
Regional telecom operators also retain their leadership status on the dial-up access market, which, incidentally, showed a less dynamic growth trend, i.e. about 20% in 2008. It’s also noteworthy that Svyazinvest’s share of the dial-up access market stood at 25% in terms of revenue in 2008, and continues to decrease.
The datacom business expanded at a steady pace at RTOs, increasing in the range of 42-57%. Svyazinvest’s companies have strong future growth potential in nearly all of their regions of activity. The penetration rate of broadband Internet access in the regions (outside of Moscow) stands at 13% of the total number of households.
In addition, regional telecom companies retain the ability to use their own telephone lines to organize access. As of year-end 2008, the number of telephone lines used to organize DSL access stood at 12%.
In areas where the density of DSL connections has begun to create technical limitations in connecting new clients, the plan is to upgrade networks, which will also make it possible to raise the speed available to end subscribers and implement a broader array of value-added services.
So far, the rollout of such services as IPTV is in the initial stage, and the total number of subscribers is around only 70,000. Nonetheless, this service is gaining popularity at the holding’s subsidiaries which were among the first to launch IPTV. Thus, 10% of the company’s subsidiaries have signed up for this service.
Thus, datacom services, as the most rapidly expanding segment, are becoming the holding’s core revenue driver. Until recently, the contribution of this segment to the aggregate growth of regional telecom operators has been quite small due to the insignificant share which it holds in the RTOs’ revenue mix.
However, the proportion of datacom is rising quickly, having increased 4.7-fold in 2008, thus becoming the holding’s third largest market segment which looks poised for rapid expansion moving forward.
Needless to say, the economic crisis has slowed down the rollout of datacom, but the number of new clients using this service on the networks of Svyazinvest’s companies looks set to increase due to the high and growing popularity of broadband Internet, which will number in the hundreds of thousands in 2009.
And while the holding plans to cut its investments in half – from $2.9 bln to $1.6 bln (at the average 2008 exchange rate of Rub 24.87/$1) – many of its competitors have been forced to completely abandon their regional expansion programmes. This will allow Svyazinvest companies, which run the most developed subscriber access networks in the country, to draw in the largest possible number of new clients using the least possible amount of investments.
A number of important issues remain in order for the holding to raise its profit margins, including further tariff hikes and the deregulation of the LD telecom services provided by Rostelecom.
